Rewarding Long-Term Stock Ownership
We hate it when the European Union seems to forge far ahead of us on governance issues…so we did a double take when we read in the Financial Times that “Loyal shareholders in European companies would gain extra voting rights and a bigger slice of dividends under a proposal being floated by Brussels to spur long-term investment.”
There’s something to be said for getting older, we guess…since, guess what…we in the US have “been there, tried that,” and by and large found that many ideas are not all that workable.
Way back in 1986 a mini-movement sprung up here to give long-term shareholders extra votes for each year they held the stock – generally with a cap of up to ten votes per share. American Family Life was the first adopter, and ultimately about two-dozen companies did the same – including Church & Dwight and McKesson, which have since dropped the feature. A few companies still have it, and still shake their heads each year, figuring out how to make it work.
The biggest practical problem is how to track and how to validate such added rights – since so many shares are held in street name these days, and they are mostly treated as a “fungible mass.” But the real problem is that the theory behind the super-voting idea no longer works as intended…and, in fact, often reinforces the size of the “problem” it was meant to fix: The idea back then, was that loyal, long-term investors – who were mostly individual investors – would always vote with management – and against those activists and “short-termers.” Today, of course, the longest-term investors are those often pesky institutions…and many of them are serial “proponents” of ideas that management is not usually so keen on.
Tracking added “rights” to added dividends for long-termers is equally difficult, if not currently impossible where street- name positions are concerned – and equally problematic is devising a truly appropriate and effective “reward mechanism.”
But as we consulted our “private archive of history stories” we found several ideas that DID WORK – and that will still work to reward long-term investors we believe.
The first goes all the way back to 1980 – when the Committee on Capital Formation Through Dividend Reinvestment was formed – spearheaded by over 30 electric, gas and telephone “utilities” – and yes, they were all regulated utilities back then – with a constant need to make sizable capital improvements, both in capacity and infrastructure. And, in the case of banking institutions – that also signed on enthusiastically to the movement – there was a constant need for “regulatory capital” to safely underpin and fuel their growth. The movement was endorsed by a veritable “Who’s Who” of major companies and their trade associations. The basic idea was to totally exempt dividends that were reinvested in qualified companies from federal income taxes (dividends were then taxed as ordinary income) – with profits to be taxed later, at more favorable capital gains rates. (A big shout-out should also go to Morgan Lewis & Bockius for the great work they did here to get the legislation passed – known as the “Pickle Bill” for its prime sponsor.)
A much watered-down version of the proposed bill – with “caps” on the amounts that would qualify in the very low amounts of $750 for dividends and up to $750 more in “optional cash” - and with a four-year sunset provision – was passed in 1981.
Here’s a quote from the first–quarter’s status report in 1982: “Over 2,000,000 shareholders – in general the smaller ones – participated in the 1st quarter”. A truly eye-popping number, no?) “In the 1st quarter, some $345,000,000 of new common stock was provided through dividend reinvestment, with another $100,000,000 provided under the optional cash investment provisions. Such new common stock capital is being used to finance essential new productive facilities, increase output…provide increased employment and significant stimulus to the national economy.” In the second quarter, the program generated over $550 million in new investment. And remember, these are 1982 dollars! How the devil did we ever let this lapse??? But oh, yes, that’s our Congress in action…or rather, in inaction. Would something like this work today? We’d guarantee it!
So let’s turn to another, similar idea – offering a smallish discount – usually only 3% is enough to produce strong cash flows - both from reinvested dividends and “optional cash.” Please note that a 3% discount on new stock purchased turns a 3% yield into a 6% yield. And the discount is far less than a company’s normal “flotation costs.” Following the Latin American debt crisis, also “way back when” in the late ‘80s - the bank your editor worked for desperately needed new regulatory capital – and our 2% discount captured over half of our entire quarterly dividends – allowing us to gradually, and “systematically” raise nearly $1 billion a year…while watching the stock price very gradually recover. Many REITS still use this method with huge success.
One last thing we reported on not so long ago – the Hampden Inns “Loyalty Shares” program – where business travelers and other guests were able to easily covert their “points” to shares of stock was another HUGE win/win for the company and its shareholders…until the company was taken over, and sadly, the new management was not a very keen or daring thinker on this score. Do WE think this will still work for good companies, with the right kinds of products, services and customer demographics? Absolutely! As loyal stockholders, we’d say, “Wanna give us more votes? Simply give us more shares!”